On 20 September 2017, the Insurance in Superannuation Working Group (ISWG) released a draft Insurance Code of Practice for Superannuation Trustees (Code).
The objective of the proposed Code is to improve the insurance in superannuation offered to fund members and to regulate group insurance in superannuation, particularly its automatic issuance on an opt-out basis.
The draft Code outlines a set of industry standards and new measures for all classes of insurance in superannuation, including life, total and permanent disability (TPD) and income protection.
Fund members generally hold insurance cover automatically through their superannuation account, and the Code identifies that there is a risk that members may not have engaged adequately to ensure the cover they hold is appropriate for them.
The Code is intended to bind Superannuation Fund Trustees that offer insurance within an APRA-regulated superannuation fund.
The proposed Code:
(i) addresses a Trustee’s processes in providing insurance to fund members;
(ii) is designed to preserve automatic cover for fund members rather than create an opt-in scheme;
(iii) proposes that when a new member joins a fund, the Trustee must ask for permission to carry out a search for any other insurance cover that the member holds in superannuation;
(iv) is intended to promote a Trustee designing and assessing benefits against different segments of the membership for appropriateness and affordability.
The Code is built upon a series of previous ISWG consultation papers dealing with the following headline matters:
(i) Account balance erosion due to insurance premiums – members paying for unnecessary cover through having multiple super accounts.
(ii) Claims handling – practices and processes associated with insurance claims handling to improve the member experience.
(iii) Member communication and engagement – to improve member engagement and understanding of insurance arrangements within superannuation.
(iv) Data management – to enhance member insurance outcomes by improving access to timely and relevant information.
(v) Premium Adjustment Mechanisms – ‘profit share arrangements’ apply across the industry and operate in practice.
Impact on Trustees
The proposed Code introduces a range of requirements which will impact on Trustees and operational processes:
(i) to prevent a fund member paying a premium for benefits that are not needed or for which they may not be able to claim – refunds of premiums are to be provided to members who are unable to claim a benefit in various circumstances.
(ii) to identify where a fund is no longer receiving contributions for a member – for example upon the member ceasing employment or contributing to another fund.
(iii) for Automatic Insurance Members, to ensure their balance is not inappropriately eroded, cover will automatically cease where no contributions are received for 13 months if no response is provided to any of the three communications provided by the Trustee.
(iv) communication requirements in the Code designed to prompt members to evaluate the appropriateness of their cover, with options provided to easily change or cancel cover – Trustees are required to make the process of cancelling, or “opting out” of automatic cover straightforward and transparent for members.
(v) a requirement for the Trustee to adopt an active role in the insurance claims process, and to ensure that a member making a claim receives regular updates on progress and a decision in a reasonable timeframe.
(vi) a maximum premium limit that Trustees must use when designing benefits for automatic cover, which is 1% of ordinary time earnings for relevant segments of the membership.
(vii) premium adjustment payments to be passed on to insured members through adjustments to future premiums.
The proposed Code also contemplates a framework for independent monitoring of Code compliance, which closely follows ASIC Regulatory Guide 183 (containing ASIC’s requirements for the approval of financial services sector codes of conduct). In this regard, the proposed Code contemplates the creation of an independent committee to carry out the function of code administrator.
A copy of the proposed Insurance in Superannuation Code of Practice which contains the mandatory service standards can be found at http://www.aist.asn.au/.
Meridian recommends that all Trustees review the proposed draft Code as it is far ranging.
Submissions and comments on the draft Code and the key questions are due by Friday, 20 October 2017.
It is proposed that a final version of the Code will approved and published by the end of 2017.
If you have any questions relating to issues raised in this article, please contact Michael Bracken, Principal.